Stochastic Dominance and Behavior towards Risk: The Market for iShares

26 Pages Posted: 22 Mar 2009 Last revised: 19 Jan 2012

See all articles by Dominic Gasbarro

Dominic Gasbarro

Murdoch University

Wing-Keung Wong

Asia University, Department of Finance

J. Kenton Zumwalt

Colorado State University, Fort Collins - Department of Finance & Real Estate

Date Written: March 20, 2009

Abstract

Prospect theory suggests that risk seeking can occur when investors face losses and thus an S-shaped utility function can be useful in explaining investor behavior. Using stochastic dominance procedures, Post and Levy (2005) find evidence of reverse S-shaped utility functions. This is consistent with investors exhibiting risk-seeking tendencies in bull markets and risk aversion in bear markets. We use both ascending and descending stochastic dominance procedures to test for risk averse and risk seeking behavior. By partitioning iShares’ return distributions into negative and positive return regions, we find evidence of all four utility functions: concave, convex, S-shaped and reverse S-shaped.

Keywords: stochastic dominance; risk aversion, risk seeking

JEL Classification: G11, G15

Suggested Citation

Gasbarro, Dominic and Wong, Wing-Keung and Zumwalt, J. Kenton, Stochastic Dominance and Behavior towards Risk: The Market for iShares (March 20, 2009). Available at SSRN: https://ssrn.com/abstract=1365756 or http://dx.doi.org/10.2139/ssrn.1365756

Dominic Gasbarro

Murdoch University ( email )

South Street
Murdoch 6150, Western Australia
Australia

Wing-Keung Wong (Contact Author)

Asia University, Department of Finance ( email )

Taiwan
Taiwan

J. Kenton Zumwalt

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States

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